True change doesn't happen on the margins. True change happens when entrenched models are questioned, especially models cemented in place for decades, resistant to time and frustration, ossifying even amid upheaval around them.
Such it is with the hotel procurement process, one cursed by buyers yesterday and today for its short contract lengths, seemingly perpetual negotiations and renegotiations and the constant churn of requests for proposals. It's not a process particularly beloved by hoteliers either, for many of the same reasons, but it's in a sector in which leverage can change rather quickly. Given that many buyers and hoteliers over the years have at one point or another held the upper hand, a better way to contract—and one that both buyers and suppliers could agree to—has eluded the industry.
Until, perhaps, now. San Jose, Calif.-based tech giant Cisco Systems has signed multiple multi-year deals with multibrand hotel companies that contain no marketshare targets or room-night commitments, promising instead only revenue in exchange for lower room rates.
The terms of the deals are perhaps deceptively simple, but they are generating results: Cisco claims significant hotel spending savings for the first year since the contracts have been in effect, and it appears that hotel chains have increased profit from their client, despite the lower rate offered.
That may seem counterintuitive, but new games have new rules.
"It's a science, and we're applying a science when I think other people are kind of playing just a price-negotiation game," said Cisco chief procurement officer Rob Falivene. "We created a different game for Cisco in the technology industry."
Seeing Around Corners
A longtime member of BTN's Corporate Travel 100, Cisco is among the largest buyers of travel in the world, and commensurately had negotiated in traditional fashion low hotel rates throughout the world. Still, Cisco, which closely watches and analyzes travel program metrics, a few years ago began to wonder whether those rates, though lower than a great many companies were receiving, were low enough to sufficiently reflect the amount of Cisco's business, and whether the hotel contracting process perhaps contributed to that disconnect.
"I was newly reporting to Rob, and one of the first conversations we had was, 'What are we doing that's forward-thinking? What are we doing that's different? What are we doing that creates not only a better program for Cisco but for the industry and how are we helping our partners?' " said Cisco director of global travel Susan Lichtenstein. "When you're in the top 5 percent of the lowest rates already in the world, that's a tough challenge to get from your boss."
Added Falivene, "We reached out to our partners to say, 'Look, we need to see around the corner a little bit here. You can't keep doing things this way, because supply and demand and the economic crunch are going to take money from you and it's going to take money from us, and we don't want to let that happen.' "
Around the corner was the realization that the true value of Cisco's business—and that of any company—to a hotel company is best measured in sheer spending, not marketshare percentages or room nights booked. And that's the basis, according to Falivene and Lichtenstein, on which hotel deals should be set. Committing revenue to hotel companies for a set period of time not only largely would inure Cisco from the annual vagaries of the hotel marketplace but also could improve hotels' bottom line.
A New Negotiation
Rarely, of course, do suppliers enter into new forms of agreements lightly, and such was the case when Cisco approached hotel companies with its proposal to negotiate based on revenue.
"We went to our partners and said, 'We want to do this by spend. We want to be really strategic, not dynamic, not static, but strategic. What does it make sense to do this with?' The first reaction, of course, was, 'no,' " Lichtenstein said. "Then after about 12 months of really partnering to find the gaps and change the process together—we could not do this apart, we had to be better together—we really looked at that process. We really drilled into every brand, every property, where we're doing business, where offices are, where we're spending money. We started negotiating on spend versus market share, shortened the list of partnerships that we have, and aligned them to our strategy."
In the end, Cisco in 2013 signed five-year contracts (with "check-ins" during the third year) that commit Cisco to deliver certain levels of revenue in exchange for lower rates. Should Cisco deliver more revenue than projected, rates would decrease further. Among the hotel companies that have agreed to deals with Cisco are Marriott International and Starwood Hotels & Resorts Worldwide.
Still, those negotiations are easier described than conducted. A key complication was the franchised nature of hotel ownership, in that individual property owners may or may not find Cisco's initiative worthwhile. Lichtenstein said Cisco basically left that discussion to hoteliers.
"My feeling is, if I put a chunk of money into a partner, into a brand, into a chain, they need to figure out how to get that revenue around where it needs to be," Lichtenstein said. "We went to them and said, 'Hey, you're subject matter experts. You go to your franchisers and explain why it's good for them to do this. We'll make sure that we're managing that spend where we said we would manage it.' That took away the whole supply-and-demand issue.
"The strategy belongs to me; it belongs to Cisco," she continued. "The execution of that strategy belongs to my partner."
Key to the deals was proving to hotel companies that the new structure would enable them to realize more revenue from Cisco, even though rates would be lower.
"Once we were able to show them that they could balance revenue from our usage, as we would give them our spend, they then balanced the demand and were able to see where, as long as they get our spend and they assured themselves they're going to get the revenue, then they could lower our rates based on our larger spend," Falivene said.
Given the size of the revenue pool that Cisco offers, though, Falivene and Lichtenstein expect that hotel companies should not only agree to negotiate on the basis of that revenue but also compete with their peers for the right to gain a part of it.
"They know what we have to spend, they know what our needs are and where we demand rooms," Falivene said. "We allowed our partners to signal to us how badly they want our business. It is still today a competition. The competition is around [the fact that] they know there are few customers like us. How badly do they want us to stay at their place, as opposed to building a hotel of our own in certain locations or downscaling to a lower-tiered property?"
The service that hotel companies offer Cisco and its travelers goes a long way to winning that competition, he said.
"They know they can earn more by improving service and delivery and cost on our basic spend," Falivene said. "That gets you more. It might get you some go-to-market stuff from their perspective to have us use their properties as temporary offices. It might get you a big Cisco meeting and event once a year. A dinner. That's where we feel like we are still very competitive, but it's a partner model."
Lichtenstein cited other personal touches as service improvements since the new contracts were enacted: special recognition at check-in, special on-property events for Cisco travelers and the like. "That's what [hotels are] focused on—not the price anymore—and it makes a world of difference."
Cisco itself serves as a supplier to the business travel industry through its remote conferencing technology, including TelePresence and WebEx, and these and other tools can play a part in the service improvements, she said.
"We want to make sure that our teams have when they get to a hotel the ability to go online and have a video meeting," Lichtenstein said. "So let's find a place in your business centers, something simple, that we can provide for you, a faster way, a more robust way to provide those face-to-face solutions without having to travel farther or more or go outside the hotel to make that happen. That's been going really well for both companies actually and [travelers can] stay there longer, which creates ancillary services for them."
Guiding Travelers
Committing revenue to a hotel company necessitates that travelers are at least guided to stay at that company's properties. While the service improvements at these hotels serve as a lure for Cisco's travelers, especially repeat customers, Cisco's travel policy also governs travelers' hotel choices.
Cisco's policy requires travelers to book through Cisco's preferred channels in order for the booking to qualify as a reimbursable business expense, Falivene said, and a prompt in its online booking tool will prevent noncompliant hotel bookings without senior manager approval.
"Not only do we have a policy, not only do we direct them in an automated tool, not only do we drive their choices, but we also have a compliance effort around it," Falivene said. "It's a big deal at Cisco."
That said, Lichtenstein credits the hotels' service improvements with driving travelers' choices, especially those visiting for a second time or more.
"Our travelers feel that difference when they get there," she said. "If they don't feel it, if they don't know it, it doesn't matter what your policy is. The travelers, the second time they come back in the system, go right back to that preferred property. They don't even think about it because they know, 'I'm going to be recognized, they care about me.' "
And that loyalty, Lichtenstein said, helps make it worth hotels' while to be a part of Cisco's program. "The number-one thing hotels want, when I sat with their executives and said, 'Don't tell me about room rates; tell me your number-one goal this year,' the answer has always been the same. Loyalty. Repeat customers. How do I create loyalty for that person who's on the road?"
Added Falivene: "The only way they drive new revenue is to get loyalty where there's no question where you're going to stay."
The Bottom Line
With about 15 months of data to analyze since the new contracts took effect, Lichtenstein said Cisco's hotel cost savings—"I'm not talking cost avoidance"—were about 25 percent from the prior 15-month period, and she said about 80 percent of the contracted hotel companies' properties worldwide are participating. Additionally, she said, revenue for those hotel companies from Cisco has grown significantly.
Cisco closely monitors its performance as well as that of its suppliers, Falivene said.
"We have a very disciplined quarterly business review process," he said. "We have a supplier performance and recognition tool. We have a scorecard. We have all of the operating metrics that we stare at every day in hotels, as we have in the rest of our spending map. It's all about that supplier relationship management and supplier performance coming together in a partnership that we spend a lot of time with.
"There are thousands of suppliers and service providers today that we don't do that with that five years ago were a bigger part of Cisco's supplier mix," he continued. "They're not there anymore because they couldn't get to this kind of approach with us."
Falivene and Lichtenstein are aware that their model has the potential to change the way many companies—especially those of Cisco's size—manage hotel procurement. It's an idea whose time has come, Falivene said.
"The feedback has been that it's certainly better than it used to be," he said. "It just took somebody with enough gumption to be disruptive and put our spend out there and develop something better."
This report originally appeared in the Nov. 24, 2014, edition of Business Travel News.